PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

2022 Closes with Positive News on Inflation

By at 12 January, 2023, 8:36 pm

by Raymond J. Keating – 

The recent positive trend in inflation continued in December, according to the latest report from the U.S. Bureau of Labor Statistics.

Consumer Price Index inflation for December came in at -0.1 percent. As noted in the following chart, inflation dropped dramatically during the second half of 2022. Previously, inflation – i.e., a sustained rise in the general price level – had been running hot from early 2021 to mid-2022.

Source: Federal Reserve Bank of St. Louis, FRED

With lower monthly reads on inflation recently, the inflation rate for the past year has been coming down, with it registering 6.5 percent in this December report. That 12-month gauge of inflation compared to 9.1 percent in June 2022, 7.0 percent in December 2021. To put that all in perspective, the 12-month read on inflation in December 2020 was 1.4 percent and in December 2019, it was 2.3 percent. And from 2009 to 2018, it averaged 1.8 percent.

Inflation effectively is a tax that eats away at the value of the dollar, and undermines investment by creating uncertainty and risk, as well as increasing the real tax rate on investing since capital gains are not indexed for inflation. This six-month trend on inflation is good news, and hopefully, it will continue, where we get back to an inflation rate of two percent or less.

Federal Reserve Bank of St. Louis, FRED

The Federal Reserve can best help that happen by leaving interest rates to the market, and simply focus on continuing the process of drawing down the unprecedented loose money it has been running since the summer of 2008.

As noted in the above chart, the Fed’s massive expansion in the monetary base largely found itself in expanded bank reserves and inflation remained tame. But when the economy faced serious issues coming out of the pandemic – such as supply chain problems and tight labor markets – and that was combined with loose money, it was fertile groundwork for inflation.

As the private sector has worked to alleviate severe supply chain issues, for example, and the Fed has sent signals that it’s now serious about fighting inflation, the fact is that inflation has quieted over the past six months. That doesn’t mean that the period of guarding against inflation is over – as the Fed should always be about price stability – but it does mean that Fed foolishness of trying to undermine the economy as an avenue for bringing inflation down must cease. If not, the threat of recession – indeed, stagflation – will get magnified.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.

 

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